Survey: In-Plan Retirement Income Options Lacking

Despite rising demand among workers for guaranteed retirement income options, such as annuities, in their employer-sponsored 401(k) plan, few companies bother to offer them, a new survey of defined contribution plan recordkeepers has found.

Obstacles to sponsor adoption of in-plan retirement income products include higher fees, portability issues, safe-harbor concerns and a poor understanding of annuities, according to the survey by asset management researchers Cerulli Associates in Boston.

Nearly one-third (32 percent) of recordkeepers said that none of their defined contribution plan clients had adopted a guaranteed in-plan retirement income options, the survey found.

Another 28 percent of recordkeepers said that fewer than 6 percent of defined contribution plan clients had adopted guaranteed in-plan retirement income options, the survey found.

“Defined contribution sponsors and recordkeepers have considerable work to do in expanding the range of distribution options available to retired or separated participants to access their savings in a flexible manner,” said Jessica Sclafani, associate director at Cerulli, in a news release.

Cerulli’s survey’s results corroborate the findings of a report published earlier this year by the Government Accountability Office.

The GAO found that about 75 percent of 401(k) plans did not offer an annuity option for workers approaching or already in retirement.

A major reason companies give for not offering annuity options is that the Department of Labor is seen as giving few liability protections, or “safe harbor” clauses, to plan sponsors during the payout phase should something go wrong.

Payout or decumulation phases could potentially last 30 or 40 years.

Advisors Betray a Bias

The surveys are only the latest evidence of the broader structural shortcomings within the defined contribution retirement system.

Employer sponsored plans under the 401(k) clause of the tax code are set up as asset accumulation vehicles, not as decumulation vehicles and as a result employees have dozens of investment options to choose from but far fewer choices when it comes to payouts.

“While some defined contribution plan participants may have access to retirement income projections on their statements of plan website, there remains a lack of in-plan investment solutions that facilitate the transition from accumulation to decumulation,” Sclafani said.

Even advisors betray a bias against income-oriented products, the Cerulli research found.

Only 6 percent of all retirement specialist advisors include variable annuities in their product mix compared with 10 percent of “emerging retirement specialist” advisors, Cerulli’s research found.

In addition, 3 percent of all retirement specialists add other insurance products such as fixed annuities, variable life insurance and long-term care of products to the mix. That compares with 7 percent of emerging retirement specialists who add them to theirs, Cerulli found.

Higher fees and tighter regulation involving variable annuities have made it more difficult for insurance products competing for shelf space among employer-sponsored retirement plans compared with mutual funds and exchange traded funds.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected]